tax credit – K & R Strategic Partner's LLC

Section 179 Deductions

Tangible business assets include vehicles, equipment, and furniture. Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. Depreciation ties the cost of using an asset with the benefit gained over its useful life. The IRS specifies the useful life of many types of assets under the Modified Accelerated Cost Recovery System (MACRS).

For example, if a realtor purchases a car to drive to showings for $30,000, the car would be depreciated over 5 years. Each year, depreciation would be deducted until the accumulated depreciation equals the purchase price.

However, taxpayers might prefer to deduct the full purchase price in the first year instead of over the useful life of the asset. Deducting the full cost of the asset would result in a lower taxable income and therefore a lower tax burden, leaving more cash on hand for investment in the business or for distributions to the owner during that year. Furthermore, the time value of money posits that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim.

In some cases, the taxpayer can elect to immediately expense the asset rather than following the rates outlined in MACRS. The tax code has this provision in place to encourage business owners to grow their business with the purchase of new equipment.

Section 179 of the Internal Revenue Code outlines the requirements for an immediate deduction. For 2022, the maximum deduction is limited to $1,800,000. The property must be placed into service during the tax year in which the deduction is being claimed. In our realtor example, placing the car into service would be driving it to a business appointment. Assets must be used for business purposes more than 50% of the time to qualify for Section 179 deductions.

If you have questions about the purchase of business assets or any other tax-saving opportunities, call our office at 480-392-6801.

Overview of the Inflation Reduction Act of 2022

Background

The Inflation Reduction Act that was signed into law in August is a remnant of the “Build Back Better Plan.” The original $6 trillion dollar proposal was supported by President Biden and essentially comprised his domestic agenda. While most of the original proposal died in legislation, a very limited portion of the plan was passed in the bipartisan Infrastructure Investment and Jobs Act.

Unlike the Infrastructure Investment and Jobs Act, the Inflation Reduction Act passed much more narrowly with a 220-207 vote in the house. In the Senate, Vice President Kamala Harris cast a tiebreaker in the final 51-50 vote.

The focus of the resurrected proposal was likewise narrow: investment in green initiatives and healthcare. What does this bill mean for American Taxpayers?

Key Provisions

Residential Energy Credits

Residential Energy Credits that were set to expire have been extended for 10 years to encourage investment in clean energy by American families. Congressional leaders hope that these incentives will reduce carbon emissions.

First, the credit for rooftop solar panels has been extended. Homeowners can also receive credits for making energy-efficient improvements to their homes. Qualifying projects include energy-efficient:

Water heaters
Heat pumps
HVAC systems
Windows
Doors

Starting in 2023, the credit for energy efficient residential improvements will be equal to 30% of the costs for all eligible home improvements made during the year. Furthermore, the $500 lifetime limit will be replaced by a $1,200 annual limit on the credit amount. To maximize tax savings, homeowners can time their qualifying home projects to claim the maximum credit each year.

Electric Vehicle Credits

Like the residential energy credits, electric vehicle credits are extended for 10 years. The credit applies to both new and used electric vehicles. One major change is the expansion of the credit from solely electric vehicles to any “clean vehicle” which includes hydrogen fuel cell cars.

Notably, the law limits the credit with caps on the taxpayer’s income and the retail sales price of the vehicle. The limits effectively exclude higher-priced luxury electric vehicles. On the other hand, the new law eliminates the 200,000-car cap for claiming the credit, which will allow manufacturers like Tesla, General Motors, and Toyota to qualify for the credit.

In addition, the law revived the tax credit for installing EV recharging equipment at personal residences. These residential and electric vehicle credits aim to incentivize taxpayers to reduce carbon emissions.

Healthcare

Beyond these “green”-focused credits, the Inflation Reduction Act also subsidizes healthcare initiatives. It extends premium reductions from the Affordable Care Act through 2025. Eligible individuals and families who purchase their health insurance through the federal Health Insurance Marketplace can continue to benefit from lower health care premiums, a policy that has been popular with taxpayers.

The Inflation Reduction Act also makes changes to Medicare prescription drug policies. First, it allows Medicare to negotiate the price of certain prescription drugs, bringing down the price beneficiaries will pay for their medications. In addition, Medicare recipients will have a $2,000 cap on annual out-of-pocket prescription drug costs, starting in 2025.

Funding the Bill

Since the environmental and healthcare programs in the bill will likely carry a high cost, taxpayers and experts alike have questioned how the act will be funded. Provisions include a 15% corporate minimum tax, an excise tax on stock repurchases, and, perhaps counterintuitively, an increase in IRS funding.

Corporate Minimum Tax

Media outlets have famously pointed out very large companies that pay very little in federal taxes—Amazon, Nike, and FedEx, just to name a few. Under the new law, large businesses with more than $1 billion in annual adjusted income will pay a minimum corporate tax rate of 15%. While there are significant differences in calculating income for tax purposes and income for financial statements, the corporate alternative minimum tax is based on financial statement income. Corporations will need to compute two separate calculations and pay the greater of the two.

Excise Tax on Stock Repurchases

A stock buyback occurs when a company that issues stock pays shareholders the market value per share to reacquire a portion of its ownership. Corporations might repurchase stocks for reasons including company consolidation, equity value increase, and looking more financially attractive. After December 31, 2022, covered corporations that repurchase stock will be subject to a 1% excise tax. This policy might incentivize corporations to return capital to shareholders through dividends rather than through stock repurchases, but it is unclear how companies will react.

IRS Funding

Over the next 10 years, the Inflation Reduction Act allots $80 billion of additional funding for the IRS. Proponents argue that the budget increases will allow the IRS to close the “tax gap.” The tax gap is the difference between what taxpayers owe in taxes and what they actually pay. Some estimates place the tax gap at $600 billion. Priorities will likely include increasing staffing levels and modernizing outdated processing systems. In the bill, $5 billion in spending is allotted for technology.

A Government Accountability Office report found that historically, lower-income taxpayers have faced higher-than-average IRS audit rates. 2021 data show that IRS audit rates for people with an annual income of less than $25,000 were five times higher than audit rates for high-income taxpayers. However, the Treasury Department has indicated that low or middle-income earners and small businesses will NOT be the focus of increased IRS enforcement activity.

Impact on Inflation

Despite the promising name, most experts suggest that the Inflation Reduction Act is unlikely to have an impact on inflation. The Penn Wharton Budget Model, a nonpartisan, research-based organization at the University of Pennsylvania, and the Congressional Budget Office, a federal agency that provides budget and economic information to Congress, are among the organizations that have expressed a lack of confidence in the legislation’s likelihood to lower inflation. While the opportunities for extended tax credits and lower healthcare costs are attractive to many taxpayers, the strain of inflation continues to weigh on American families.

Even faced with uncertain economic conditions, proactive tax planning can help taxpayers keep more of their income. If you have a question about qualifying for extended tax credits or want to explore strategies to lower your income tax burden, call our office at 480-392-6801.

Arizona Corporate Credits

Business owners in Arizona have a unique opportunity to offset their personal tax burden dollar for dollar by having their corporation make a charitable donation. Specifically, s-corporations can donate up to the state income tax liability of the business owner for the given tax year.

Substantial Tax Savings

Unlike the Arizona individual credits, the Arizona business tax credit is eligible for a tax deduction on your federal business tax return. Your business will record the donation as a marketing expense, lowering your taxable income.

These credits require a minimum contribution of $5,000; however, this substantial investment carries even more potential for tax savings. Let’s consider the impact of even the minimum donation:

State $5,000 donation = $5,000 tax credit

Federal $5,000 donation x 24% marginal tax rate = $1,200 in tax savings

Total $6,200 in total tax savings

Applications and STOs

While the individual credit is available to every Arizona taxpayer, the corporate tax credit requires an application. Applications are open to c-corps, s-corps, and LLCs that are taxed as s-corps. Donations must be made to a School Tuition Organization (STO) certified by the Arizona Department of Revenue.

STOs award scholarships to underprivileged children so they can receive the education they deserve. Eligible students must meet a state defined low-income threshold. Donors can designate money to a particular school but not to a particular student.

Timing Considerations

Applications open July 1, but the state allocates a limited amount of funding to the credits on a first come, first served basis, so timing is critical. Contributions must be made during the tax year for which the credit will be taken. If the application is approved, the business has 20 days to make the donation to the STO.

A new round of applications for this business credit opens to Arizona corporations on July 1, 2022. Remember that all donors MUST have prior approval by the state. K&R can connect you with a qualified STO and help with your application. To get started, call our office at 480-392-6801.